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5-year fixed mortgage rates in more detail
After consecutive years of record-low interest rates in Canada, we are entering a period of rising rates—which makes the cost of borrowing money, be it for a mortgage or a student loan, more expensive. The possibility of more rate hikes can make the stability of a five-year fixed mortgage rate seem like a good option compared to one with a variable rate—especially for first-time homebuyers or those about renew their existing mortgage . In fact, five-year fixed-rate mortgages are the most popular mortgage product in Canada. However, as with any financial product, they still have their drawbacks.
Before speaking to a lender or mortgage broker, learn more about how they compare to five-year variable mortgage rates .
What is a five-year fixed mortgage rate?
As the name implies, a five-year fixed-rate mortgage comes with a mortgage term of five years—that’s the duration for which your mortgage contract remains in effect. In Canada, mortgage terms range from six months to 10 years, with five years being the most common.
With a fixed-rate mortgage, your mortgage interest rate is locked in for the period of the contract. This means you can predict what your mortgage payments will be until your mortgage contract comes to an end and it’s time to renew.
For this reason, fixed-rate mortgages can provide a greater sense of security than variable-rate mortgages. With a variable-rate mortgage, the interest rate can fluctuate throughout the term. This flux occurs as lenders adjust their prime rates in response to changes to the Bank of Canada’s overnight rate . The prime rate is currently at 5.45%.
Finally, fixed-rate mortgages can be open or closed. Whereas an open mortgage comes with the option of making additional regular or lump-sum mortgage payments without penalty, these actions are financially penalized with a closed mortgage. As a rule of thumb, closed-term mortgages come with lower interest rates because they offer less flexibility than open mortgages.
The table at the top of this article provides a glance at the best mortgage rates offered by a swath of Canadian lenders. If you are shopping for a mortgage on a new home purchase, input the home price, down payment amount and location to view the best mortgage rates available. The tool can also be used to view mortgage rates for products with different rate types, such as variable, and terms, such as 25 years.
Using the green tabs at the top of the table, you can also view mortgage rates for the following:
Mortgage renewal: If your mortgage term is coming to an end and you have an outstanding mortgage balance, you will have to renew your contract for another term. You can do this with either your existing lender or another one—but it’s always good to shop around. To view mortgage renewal rates for a new five-year term, enter your current mortgage balance, remaining amortization, mortgage payment frequency and location.
Mortgage refinance: If you want to break your current mortgage contract and negotiate a new contract, that’s called refinancing . You may want to do this to take advantage of lower interest rates or access equity in your home . However, the decision to refinance should not be taken lightly, because you could end up paying significant penalty fees. If you want to see five-year mortgage rates on a mortgage refinance, enter your current mortgage balance, as well as the amount of equity you wish to access.
Home equity line of credit (HELOC): This is a revolving line of credit, for a pre-approved amount of money, that allows you to borrow from the equity in your home. The interest rates on HELOCs are usually lower than those for traditional lines of credit, but higher than those typically offered for variable-rate mortgages. The money borrowed through a HELOC is repaid, with interest, in addition to your regular mortgage payments.
How are five-year fixed mortgage rates determined in Canada?
Rates for five-year fixed mortgages are strongly linked to the price of five-year government bonds. Banks rely on bonds to generate stable profits and offset potential losses from the money they lend as mortgages. When banks expect their bond profits to increase, they lower their fixed-mortgage rates, and vice versa.
Historically, fixed rates have tended to hover above variable rates, however there are a few instances when variable rates have surpassed fixed rates. This historical trend suggests buyers may end up paying more for fixed mortgages, especially during periods of falling interest rates.
However, when Canadian inflation rates exceed the norm, hikes in the Bank of Canada’s overnight rate—which lead to higher variable interest rates—are often not far behind. At times like these, locking in a fixed mortgage rate could be a smart option for borrowers who want to avoid the fluctuations that come with variable-rate mortgages.
The pros and cons of five-year fixed rate mortgages
- Competitive rates: Lenders know you are shopping around and they will generally offer comparable and lower rates for your business.
- Predictability : You know your interest rate, and therefore your mortgage payments, will not change for the duration of the term. That stability can help you budget more easily.
- Potential to save money : If interest rates increase during your term, you could end up paying less than you would with a variable rate.
- Stiffer penalties : The penalty to get out of a fixed mortgage contract can be quite a bit higher than with a variable mortgage. You may also be more limited in your ability to pay off your mortgage faster through additional payments.
- Potential to pay more in interest : Historically, fixed rates have been priced higher than variable rates, with a few exceptions. In some instances, you could end up paying significantly more in interest than you would with a variable rate, if market interest rates fall during your term.
- Higher cost: You will pay for predictability and peace of mind. When comparing fixed to variable rates, you will see that fixed can be slightly higher.
Is a fixed-rate mortgage better?
Kim Gibbons, a mortgage broker with Mortgage Intelligence in Toronto, say both fixed and variable rates each have their benefits and their downsides, so it’s crucial for buyers to consider whether they value stability over potential savings.
“When my clients are trying to determine whether to go with a variable or a fixed rate, I tell them that they need to really look at their risk tolerance and whether or not they have enough income or savings to provide a buffer to handle a sudden increase in rates,” she says. “If they are going to lose sleep at night worried that interest rates are going to go up and they have a limited budget that they can’t go beyond, then a fixed rate is likely a better move. If, however, they have good incomes and a lot of savings put aside then they can better handle fluctuating rates.”
“It really depends on each person’s circumstances,” adds Gibbons. “There’s no single solution that’s right for everyone.”
When your mortgage term ends, your mortgage contract will be up for renewal. A few months before it ends, your lender will send you a renewal statement that will include details on the remaining balance on your mortgage, your new interest rate at renewal, your payment schedule and any fees that may apply. At this time, you can choose to renew your mortgage with your original lender or comparison shop for a better rate from another lender.
No matter which lender you decide to go with, it’s always worth reviewing what five-year fixed mortgage rates are currently being offered in Canada before deciding to renew or switch products or lenders.
Should you choose a five-year fixed mortgage rate?
When deciding if a fixed-rate mortgage is right for you, there are a number of key factors to consider, including the historical performance of five-year fixed mortgage rates. Depending on what happens with market interest rates during your term, you may pay extra, but those additional costs could save you from the stress of predicting ups and downs in the economy and interest rates.
More on mortgages :
- Watch: What is mortgage affordability?
- Should you get a 30-year mortgage?
- Mortgage affordability calculator